Apple: 5 Reasons For Stock Price Inflation

seekingalpha2021-08-31

Summary First, I discuss Multiple Expansion. Second, I review Financial Growth. Third, I investigate Stock Buybacks. Fourth, I dive into Customer Demand. Lastly, I poke a bit at Macro Tailwinds. ...

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手可摘棉花
2021-08-31
手可摘棉花
Yep. Hold till the end!
nicfrazier
2021-08-31
nicfrazier
thx for sharing, this meant alot as I wanted to go all in for apple

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The stock price keeps going up and up. Let's find out why.\nHere's how the article plays out. First, I discuss Multiple Expansion. Second, I review Financial Growth. Third, I investigate Stock Buybacks. Fourth, I dive into Customer Demand. Lastly, I poke a bit at Macro Tailwinds.\nReason #1 Multiple Expansion\nI'm specifically talking about the price to earnings ratio or \"PE Ratio\" going higher. It's worth pausing for a moment to really think about thedefinition:\n\n The price to earnings ratio (PE Ratio) is the measure of the share price relative to the annual net income earned by the firm per share.\n PE ratio shows current investor demand for a company share. A high PE ratio generally indicates increased demand because investors anticipate earnings growth in the future.\n [Emphasis: Author]\n\nI've highlighted the essential point which is that stock prices go up because of investor demand. I'll talk more about this in a short while. For now, just pretend that if AAPL stock supply was held steady, the price would still go up over time as demand for the stock increases.\nNow, with PE Ratio firmly in mind, consider the following as proof of investor demand over time:\nThis is a 10-year view. Clearly, buying almost any time before 2020 would have been intelligent given this rearview mirror look. And, specifically, just look at 2013 and 2016 where the PE Ratio was about 10.Incredible.\nNow, take a look at the stock price:\nNo surprise, but the rise in PE Ratio lines up rather well with AAPL's stock price. The run from 2020 into 2021 has been quite satisfactory considering the drop in the PE Ratio from 40 down to 29. The forward PE Ratio is down around 27.\nIn short, here's been a big swing up from the PE Ratio between 10 and 20 a few years ago through now, where we're seeing the PE Ratio hitting 30 to 40.\nTo bring this full circle, the PE Ratio over 10 years tells us a simple story. AAPL's stock price has gone up because of investor demand. While that's \"obvious\", keep in mind that if we isolate this demand, it tells us that investors have been willing to pay relatively more for the profits that AAPL generates. Again, I'm strictly isolating demand for now. There's more to cover, of course. This is merely one piece of the pie.\nReason #2 Financial Growth\nAAPL is a great business. Just take a look.\nData by YCharts\nI've picked some growth metrics. Clearly, Revenue, Net Income, and Cash From Operations over the past 10 years have improved. That's impressive growth, without even looking at the billions and billions in real money pouring into the business.\nI've also included Profit Margin in the picture. I did this for two reasons. First, it shows that it's not really necessary for AAPL to do an amazing job with profit margins. You don't need growth in all metrics to have tremendous overall growth, which is then reflected in the stock price.\nSecond, the Profit Margin isn't shrinking.It's almost like a heartbeat, up and down, quarter after quarter per the cycle of the business. Again, the essential point is that you don't need 100% success with all business metrics to produce incredible stock price gains.\nReason #3 Stock Buybacks\nFinancial engineering has a bad reputation because there's an implication that it's used to hide flaws in a business. But,the definition is rather neutral.\n\n Financial engineering is the use of mathematical techniques to solve financial problems. Financial engineering uses tools and knowledge from the fields of computer science, statistics, economics, and applied mathematics to address current financial issues as well as to devise new and innovative financial products.\n\nNow, that being said, perhaps some a bit \"dark\" is happening with AAPL with relation to financial engineering. For example,CNBC said this in 2019:\n\n Apple's aggressive use of its copious cash resources to\n repurchase its shares at modest valuationsin recent years has shown the power of buybacks for a maturing company in a growth lull. And, for Apple, if not the typical company, long-term shareholders have benefited without compromising the company's hiring or spending on capital investment.\n\n\n The slowdown in iPhone unit sales in the past couple of years has restrained Apple's overall growth since its fiscal year ended Sept. 30, 2015. In fact, net income this fiscal year is projected to be almost exactly equal to what Apple booked four years earlier.\n [Emphasis: Author]\n\nWhile this is meant to slander AAPL a bit, just scroll back up in this article and look at the PE Ratio of AAPL from 2011 to 2019. Looks like smart buying when the PE is up to 25, 30, and higher. I'm not saying that AAPL was supremely undervalued, but for many years, the buybacks were at least rational given the valuation. At a minimum,it doesn't appear that AAPL was hiding anything.\nFurthermore, this activity doesn't just mop up newly issued shares (i.e., options and stock-based compensation) that are often used to enrich management, and the like. See for yourself.\nData by YCharts\nAnd, in case you were wondering,Warren Buffett has largely agreedwith AAPL's buyback activity:\n\n Berkshire's investment in Apple vividly illustrates the power of repurchases. We began buying Apple stock late in 2016 and by early July 2018, owned slightly more than one billion Apple shares (split-adjusted). Saying that, I'm referencing the investment held in Berkshire's general account and am excluding a very small and separately-managed holding of Apple shares that was subsequently sold. When we finished our purchases in mid-2018, Berkshire's general account owned 5.2% of Apple.\n\n\n Our cost for that stake was $36 billion. Since then, we have both enjoyed regular dividends, averaging about $775 million annually, and have also - in 2020 - pocketed an additional $11 billion by selling a small portion of our position.\n\n\n Despite that sale - voila! - Berkshire now owns 5.4% of Apple. That increase was costless to us, coming about because Apple has continuously repurchased its shares, thereby substantially shrinking the number it now has outstanding.\n\nWhen a company buys back its own stock, your ownership in that business increases. The \"secret\" is that the company needs to be undervalued or fairly valued so that every dollar spent on buybacks is accretive, i.e., like spending $1.00 but getting $1.10 in value. The sin of buybacks will manifest when every $1.00 used only generates let's say $0.80 of actual value. Just like an ordinary investor,what you buy and when you buy will determine your results.\nSo, again, coming back full circle, AAPL has gone up because of buybacks and related financial engineering. You might agree or disagree with this activity, versus let's say, increasing the dividend. Nevertheless, buybacks have contributed to AAPL's stock price increase.\nReason #4 Customer Demand\nI previously mentioned demand but that was in relation to the stock itself. However, all stock represents ownership in a real business. We must never forget that truth.\nAnd, AAPL certainly hasn't slowed down much, at least in the bigger picture. Here's a peek at what's been released just in 2020 and 2021:\n\nSource:Wikipedia\nOld products getting refreshed, new products launching, new generations of products, new form factors, new services, and so on, and so forth. While it might sometimes seem that AAPL isn't innovating much, the reality is that this company keeps evolving and adapting.\nAgain, it might seem like AAPL is \"just a phone company\" but consider the bigger picture:\n\nSource:MacRumors\nOf course, like you, I see loads of iPhone sales. But, I see growth in tablets, wearables, services, computers, and much more. Phones are very important, maybe even still extremely important, yet the point remains. AAPL products, including the iPhone, continue to be in demand. Therefore, revenue continues to grow, and profits continue to flood into the business.\nIn short, there is demand for products and services, so the company makes a ton of money, and then investors want a piece of the action. The result is obvious. The stock price goes up because the business is selling products that people want. Investors see that in many ways and bid up the price.\nReason #5 Macro Tailwinds\nThis is rather interesting:\n\nSource:ZeroHedge\nAlong with this comment:\n\n ...since the outbreak of COVID-19\n global central banks have bought $834mn of financial assets every 60 minutes…and every 60 minutes the market cap of global tech stocks has risen $780mn.\n [Emphasis: Author]\n\nI haven't done the exact math, but what I can tell you is that money is being printed and pumped into the financial system. It's also going directly to consumers, who in turn spend or otherwise use that money.\nKeeping this simple, there are actually two ways that AAPL gets a lift. First, that added money pours into AAPL stock itself. That is, investors buy the stock. Demand for assets increases. Second, that money goes from customers directly to AAPL. Customers buy products and services, which drives up revenue and products, as I've explained previously.\nAt a very high level, consider the M2 money supply:\n\nSource:Federal Reserve Bank of St. Louis\nImagine that demand for AAPL products was being held constant. When you increase the money supply, people use that money to chase after goods and services, but also assets like AAPL stock. In other words,it inflates revenues and profits, and also the stock itself. In effect, when M2 increases, you get inflation in the real world (e.g., food, energy, clothing, etc.) but also in asset prices, like AAPL.\nI like to think about this another way. Although AAPL is getting more and more mature, it's still a growth stock. I mean that in terms of products and services, but also in terms of stock price. And, as a growth stock,it's actually acting like a battery, holding financial energy. As the M2 money supply increases at a fast pace, AAPL is the kind of company that can roughly keep pace with inflation, or even much better.\nIn plain terms, inflation is driving up prices. Because of demand, AAPL can increase prices and capture more of that money, even if each dollar is worth a bit less. Furthermore, AAPL stock continues to appreciate, holding the value of previously invested money so that purchasing power holds.\nFor many investors, it's far better to hold AAPL as an asset than cash. As the money supply increases, every unit of \"money value\" decreases. However, if your assets can keep pace, or do better, then you can keep racing ahead of that curve. Again, AAPL is a financial battery, because it holds value.\nWrap-Up\nI've provided five reasons for AAPL's stock price inflation:\n\nMultiple Expansion (PE Ratio Increase)\nFinancial Growth (Business Efficiency)\nStock Buybacks (Financial Engineering)\nCustomer Demand (More & Better Products)\nMacro Tailwinds (Money Supply & Inflation)\n\nIn large part, we can understand AAPL's stock price increase over time in relation to supply and demand. For example, the demand for AAPL stock has gone up over time because the business is getting better but also because it continues to pump out great products. Also, with stock buybacks, there's less stock to go around, and with more money floating around, investors are chasing up AAPL's price.\nThe Future\nNow, while I think AAPL is a great company, and it's not about to collapse or die off,I don't love the price right now. I think it's fine to dollar cost average, or drip dividends. But, I'm not convinced it's time to go \"all in\" on AAPL. In part, I'm saying this because I have owned AAPL since 2016 and my cost basis is down around $29. So, I'm not selling due to capital gains taxes, but I'm not thrilled about buying either. In other words, I bring a strong bias to the table.\nIf I take a step back, I will say that I'm bullish on AAPL over the longer term, or at least for the next 5-10 years and I think investors will do just fine. The company is fantastic. My problem is really that the valuation is a bit rich. I believe there could be better times to buy than now.\nIn any case, I don't know the future since I have no crystal ball. So, I'll simply say that I'm bullish, and that each investor must consider their situation, including their goals, timeline, and the like.\nAgain, I'm bullish but I'm just holding right now, and not dripping, and not adding at these prices. And,I have absolutely zero intention of selling.\nMarketplace Launch\nIf you enjoyed this article, then please keep an eye out. On Monday, September 13th, I'm launching a brand new service on the Seeking Alpha Marketplace.\nBe sure to mark your calendar. The first 25 subscribers will get25% offthe best possible price that I can offer you.\nEven better, when you're one of the first 25 subscribers, you will lock in that additional 25% discount.It will last for the lifetime of the service.","kind":"news","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":818897421,"gmtCreate":1630393326763,"gmtModify":1704959602848,"author":{"id":"3579342217954724","authorId":"3579342217954724","name":"手可摘棉花","avatar":"https://static.tigerbbs.com/eb5d81ca4420febc27175fcd21eb90b2","vip":1,"crmLevel":4,"crmLevelSwitch":0,"authorIdStr":"3579342217954724","idStr":"3579342217954724"},"htmlText":"Yep. Hold till the end!","listText":"Yep. Hold till the end!","text":"Yep. Hold till the end!","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/818897421","repostId":1169208208,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":818142455,"gmtCreate":1630389231877,"gmtModify":1704959555955,"author":{"id":"4092281613520110","authorId":"4092281613520110","name":"nicfrazier","avatar":"https://static.tigerbbs.com/19eba908926d1d1c9eff849faa47848d","vip":1,"crmLevel":2,"crmLevelSwitch":0,"authorIdStr":"4092281613520110","idStr":"4092281613520110"},"htmlText":"thx for sharing, this meant alot as I wanted to go all in for apple","listText":"thx for sharing, this meant alot as I wanted to go all in for apple","text":"thx for sharing, this meant alot as I wanted to go all in for apple","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/818142455","repostId":1169208208,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":25,"commentSize":2,"repostSize":0,"favoriteSize":1,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":false,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"laohu8","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1169208208"}